Buffett: Simple Answer to Moody’s Question

OMAHA, Neb. — Warren Buffett fielded one of the more anticipated questions of the meeting early on: What is his opinion of Moody’s Investors Service, which rated billions in mortgage securities triple A that subsequently lost value, and is a large holding of Berkshire? Should Berkshire have exerted its influence on the company, which appears to have significant conflicts of interest because it is paid by the very companies whose bonds its rates?

Associated Press

Warren Buffett, CEO of Berkshire Hathaway, right, and Charlie Munger, his vice chairman, are projected on a large screen at the annual Berkshire Hathaway shareholders meeting

Berkshire has a 20.4% stake in the company.

Mr. Buffett’s answer is characteristically simple. Everyone made the same mistake: Housing prices would continue to increase forever. “Basically, four or five years ago, virtually everybody in the country had this model in their heads, formal or otherwise, that house prices could not fall significantly,” he said, later adding that “it was stupidity and the fact that everyone else was doing it.”

He makes another point: If Moody’s had started to take a negative view on residential real estate, the ratings firm would have been hauled before Congress to testify about why it was hurting the U.S. economy with its bearish ratings.

“They made a huge mistake, and the American people made a huge mistake,” he said.

Mr. Buffett has a point. The assumption that housing prices would keep rising was widespread. But does that get the company completely off the hook? Many securities that Moody’s rated AAA were full of extremely dicey mortgages and exotic derivatives. Whatever the case, in the near future investors will have much less trust in those ratings.

If everyone made the same mistake, why were they getting paid the big bucks

9:36 pm May 3, 2009

Jon wrote :

I think the bigger Moody's conflict of interest issue for Mr. Buffett is how Berkshire can both own 20% of Moody's and be rated by it. This is particularly important since the primary business of Berkshire, investing the insurance proceeds, is completely enabled by the low cost of capital that a high credit rating affords. Is it just coincidence that Moody's delayed a rating downgrade of Berkshire by several weeks after S&P? I think not. This is pretty atrocious, but no regulator would dare "bother' Mr. Buffett. I think we've seen this movie before.

3:55 pm May 2, 2009

Anonymous wrote :

"His excuse that he didn’t want to “rock the boat” (or a better analogy would be that he didn’t want to shout “Iceburg!”) takes away from his credibility."

He never said this. He said banks that sold mortgages were regulated by a federal government that wanted them to provide affordable financing to america. It's pretty easy to see what happens when a regulator leans on a business, witness the BAC purchase of Merrill Lynch, the Obama administration theft of Chrysler and GM post bankruptcy equity to give to political supporters isn't challenged by most of the debt holders getting stolen from because they are large banks and the administration is threatening them with massive capital requirements if they rock the boat.

3:53 pm May 2, 2009

Randy Hill wrote :

Geo wrote "" No one mentioned the fallacy of his assertion that “everyone believed in never-ending increases in real estate values.” Come on! Does any investor in anything, with more than one year’s experience, believe this?""

Almost everyone believed it because of history. Geo, how can you say anyone could have seen this coming when historically, residential real estate prices had never had a significant decline for any lengthy period? Certainly not since the great depression.

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